Division 7A Explained: Taking Money Out of Your Company
Division 7A Explained: Taking Money Out of Your Company
Short answer: if your company lends you money, pays an expense for you, or forgives a debt you owe it, Division 7A can treat that amount as an unfranked dividend in your hands - taxable income, with no franking credit to soften the blow. The good news is that it is avoidable. Repay the money before the company's tax return is due, or put a complying loan agreement in place with minimum yearly repayments charged at the ATO benchmark interest rate, and you keep things clean.
If you run a small company around Mortdale or the wider St George area, this is one of the easiest rules to trip over by accident - and one of the easiest to manage once you understand it.
What Is Division 7A?
Division 7A sits in the Income Tax Assessment Act 1936. Its job is to stop company profits being handed to shareholders, or their associates, tax-free. Because company profits are taxed at a lower rate than the top personal rate, the law steps in when money leaves the company in a way that looks like a dividend but is not declared as one. Three common situations can be caught:
- Loans - the company lends money to a shareholder or their associate (which can include family members or a related trust).
- Payments - the company pays a personal expense, or lets you use a company asset for private purposes.
- Forgiven debts - the company writes off or forgives an amount you owe it.
If Division 7A applies and nothing is done to fix it, the amount is treated as an unfranked deemed dividend included in your assessable income for that year. "Unfranked" is the painful part: there is no franking credit attached, so you cannot offset the company tax already paid.
Who counts as an "associate"?
This is broader than many owners expect. An associate can include your spouse, other family members, a partnership you are in, or a trust connected to you. A loan to your family trust, for example, can still be caught - so it pays to look at the whole group, not just loans in your own name.
How to Avoid a Deemed Dividend
There are two main ways to keep a payment or loan from becoming a taxable deemed dividend.
Option 1: Repay it in time
If the amount is fully repaid before the company's lodgment day for that income year (broadly, the earlier of the due date and the actual date the company tax return is lodged), it is generally not treated as a dividend. Be careful, though - the rules look at genuine repayments, not money that is simply repaid and then borrowed straight back.
Option 2: Put a complying loan agreement in place
If you cannot repay it, you can convert the amount into a complying loan before the company's lodgment day. To comply, the loan generally needs:
- a written agreement in place before lodgment day;
- an interest rate for each year that is at least the Division 7A benchmark interest rate;
- a maximum term of 7 years (or 25 years if the loan is secured by a registered mortgage over real property); and
- minimum yearly repayments made by 30 June each year.
If a minimum yearly repayment is missed or falls short, the shortfall is treated as a deemed dividend in that year - so the repayments are not optional once the loan is set up.
The ATO publishes a free Division 7A calculator and decision tool to help work out repayments, but the structuring is genuinely technical and easy to get wrong. This is a good moment to get in touch with us before lodgment day rather than after.
The Benchmark Interest Rate
The benchmark interest rate is the minimum rate a complying Division 7A loan must charge. The ATO sets it each year using the Reserve Bank's standard variable owner-occupier housing loan rate published just before the start of the income year, and it is locked in for that year.
For the 2025-26 income year (1 July 2025 to 30 June 2026), the Division 7A benchmark interest rate is 8.37%. The rate changes annually, so always check the current figure before drawing up or reviewing a loan - we confirm it for every client agreement we prepare.
Why This Matters for Small Business Owners
For a lot of owner-managed companies, money moves between the business and the family without much paperwork - a director draws cash, the company covers a personal bill, or a loan account quietly builds up. None of this is dishonest; it is just how busy people run a business. But at year-end, those amounts can land as an unfranked dividend and a tax bill nobody planned for.
The fix is rarely complicated - it is mostly timing and documentation. Reviewing loan accounts before the return is lodged is where the value sits. That review connects to your wider business tax position and your tax planning before 30 June. If you are still deciding how to structure things, our guide on sole trader vs company is a useful companion read.
Frequently Asked Questions
Does Division 7A apply to a regular wage or director's salary? No. Properly processed salary, wages or declared dividends are taxed in the normal way. Division 7A targets loans, private payments and forgiven debts that have not been dealt with as assessable income.
My company lent money to my family trust, not to me. Am I still affected? Possibly. Associates - including related trusts and family members - are covered. A loan that does not run through your own name can still be caught, so the whole group needs reviewing.
What happens if I already have a deemed dividend from a past year? There may be options depending on the circumstances, and in limited cases the ATO has discretion to provide relief. This is firmly "get advice" territory - bring your loan accounts in and we will work through it with you.
Talk to Us Before Lodgment Day
Division 7A is one of those rules that is simple to manage early and expensive to fix late. If your company has lent you money, paid a personal expense, or you are unsure whether a loan account is a problem, let's review it before your return is due.
Call MJE Business Services on (02) 9580 1167 or get in touch here. We look after businesses across Mortdale and the St George area, and we will keep your Division 7A position clean and stress-free. For broader support, see our business advisory services.
This is general information, not personal advice. Tax rules and dates change - please check your situation with us or at ato.gov.au.
Sources (ATO)
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